Getting a Small-Business Loan Against the Odds

Dec. 21, 2005 — -- As the Miami director for Accion USA, a nonprofit community lender, Luz Gomez meets many entrepreneurs who've been turned down for loans from traditional banks.

"The majority has already been turned down, and the rest have the perception they would be turned down," Gomez said. Accion USA's mission is to loan money to low- and moderate-income small-business owners who otherwise wouldn't receive funding. Since Accion, which began in Latin America, launched Accion USA in 1991, the network has dispensed $140 million to 14,945 people.

Rejection from banks may not be a reflection on the strength of their business ideas. But to make a business work, there has to be a solid understanding of finances. Accion USA provides its clients with a financial education, the money they need, and " a lot of hand-holding," Gomez said.

"Banks tend to shy away from smaller loans, startups, certain 'riskier' industries, or less than perfect credit scores," Gomez said. "A brand-new business, running for a month, few banks want to take that on."

Loans from Boston-based Accion USA range from $500 to $25,000, with $5,000 as the average. Accion USA donated $5,000 of seed money to the two winners of "Good Morning America's" You Inc. contest, where women submitted business ideas. Also, the organization doesn't shy away from financing businesses in the food industry, which area banks tend to dislike.

"We recognize there's a story behind most of these cases," Gomez said, "and we can be more flexible in our underwriting."

Loans from Accion USA tend to have a higher interest rate than those from traditional banks. The rate starts at 12.5 percent fixed annual and goes down to 10 percent fixed annual for a good-paying customer.

"We're always going to be slightly higher," Gomez said, "for two reasons. One, there needs to be an incentive to get out of the program. Two, it's an expense endeavor. What we do, all the time we spend with the client."

"The goal isn't to keep them under our wing forever, but to give them a financial education," she added.

Because of its mission, Accion USA can be more forgiving for poor credit ratings. People develop bad credit for all sorts of reasons. Sometimes it could be because they had to declare bankruptcy. Gomez says she encounters many women who went through bad divorces that impacted their finances negatively.

"The first step [is] to stop ignoring it. A lot of people have never seen their credit report, they just think there's something wrong with it," she said.

If your credit score is bad, there are reasonably quick ways to improve it. For example, if you have small outstanding debts that can be paid off, pay them off and get a letter that states you did so, Gomez said.

People with good credit can still be turned down for a traditional bank loan. Gomez counsels prospective clients who aren't quite ready to take on a loan. It's not a good time to take on a loan "when folks haven't planned out their startup," she said, "when the business plan hasn't been thought out clearly on the financial side."

Accion USA sometimes has to turn away small-business owners whose flailing businesses don't appear salvageable.

"At that point, we say, 'Hey, credit isn't going to help you,'" Gomez said. "'You have to have an exit strategy, you're losing money month after month.'"

Those frustrated with banks should avoid letting their credit card become their lender and charging what they need for their business when they don't have the cash to back it up.

"It's hard to manage once you get in the cycle," Gomez said.